Greg Singer:

Good afternoon, and welcome to our Explorations Webinar, What to Expect on Election Day and Beyond. I'm Greg Singer, an investment director at Capital Group Private Client Services, and we're thrilled to have you with us. Sure it won't surprise any of you to learn that election webinars are among our most popular topics, and it's obvious why, but the electorate's so clearly divided, relative handful of contests will take on outside influence, tipping the collective balance of power. Beyond that, this election is especially consequential.

Our goal today is to cut through the noise and to hone in on the potential economic and policy implications. And to help us do that, we're excited to be joined by two political insiders, Kim Wallace and Jim Messina. Kim, joining me in the studio today, is the head of Washington Policy Research at 22Volt Research. He served as the Treasury Department's assistant secretary for legislative affairs from 2009 to 2011, has appeared on Bloomberg, CNBC, Yahoo Finance, and other media outlets. Kim is a fiscal policy and financial policy expert who advises both private companies and government entities.

Jim, joining us from Spain via Zoom, is the chief executive of The Messina Group, a strategic consulting firm. He oversaw President Obama's successful 2012 re-election campaign and has advised more than 13 presidents and prime ministers on five different continents. In fact, today he was meeting with the leader of Spain, and it's his birthday, so happy birthday, Jim.

Jim Messina:

Thank you.

Greg Singer:

Yeah, thank you for taking some time with us before cracking open some Cava. One last note before we begin, we know the political landscape and the issues generate strong emotions across the political spectrum, and we're not going to shy away from sensitive topics, but we're also not evaluating the merits of any particular position.

We engage in political research for analysis, not advocacy. What's critical to us is to understand the potential economic, legislative, and regulatory scenarios that can affect the companies that we make investments in on your behalf. And finally, thank you to all of you who submitted questions during registration. We're working as many as possible into our discussion today. And so Jim, maybe I'd like to send the first question to you. What came from several of our correspondents is just frustration with how divisive the commentary is today. So to paraphrase the talking heads, how did we get here?

Jim Messina:

Greg, it's a great question. Thanks to you, and Capital Group, and Kim for doing this. So you know, it's important to remember that politics is a reflection of society and not the other way around. We really are as tied as we think we are. I have 15 presidents and prime ministers around the world as my clients, and the only Western democracy that doesn't have a third party is the United States of America, because of our electoral college. In my own personal opinion, I think we should have, because the anger you see right now in politics really derives from the bases of both parties.

Because there's no third party, we really have fights inside our parties that really kind of define our politics. On the Republican side, it's what I call the Ronald Reagan Country Club Republicans versus the MAGA folks. And it's the Bill Clinton kind of moderate Dems versus the Elizabeth Warren progressives. And too much in politics right now, people worry about their bases more than they do the swing voters. Of the 435 seats in Congress this November, only about 20 or 25 of them could actually go to both parties. That partisanship is all over the country, and I think it serves us very poorly in this moment of so many challenges. But it is important to remember that we are divided. It is a 50/50 country, and so it's not surprising when we get to the rest of this, Greg, that this election would be 50/50 as well, in both the President and the House and Senate.

Greg Singer:

Okay.

Kim Wallace:

Jim makes very good points, and I agree with him. I think you also throw in the fact that our campaign finance system underpins this lack of a third party. Just some recent evidence, in the last 50 years, the only independent candidate to make a big splash in an election was H. Ross Perot. And he had at least two advantages that separated him from other candidates. One was a lot of money and his sole decision on how to spend it. And the second was his love for organizational behavior that he learned both in the military and at EDS.

No one before, no one after has made the type of splash that he has. And my sense is that, given the construct that we described, the result is you have a lot of pressing issues in Washington that remain on automatic pilot, because the parties don't have a third party to keep them honest on policy, and it doesn't force them to make decisions.

Greg Singer:

Yeah, I guess some of the frustration I think we observe with the electorate is that we end up with change elections. I think six out of the last seven midterms have been a change in power. So where there is at least some folks in the middle that go back and forth, whoever's in power, they get frustrated with and we change. It seems to be the only thing that's consistent over recent history.

Kim Wallace:

That's true, but even in those change elections, in midterms particularly, the margins remain tight, and so it's difficult to push the ball forward if you're in charge or think you're in charge.

Greg Singer:

Yeah. So speaking of tight margins, I guess the next big area of questions that we get is what are the polls telling us? And given that polling error seems to have been pretty large in the last couple elections, can we trust the polls? What do they tell us about the state of the election?

Kim Wallace:

Well, I think you can trust public opinion surveys to reflect a divided country. That's not new, an electorate that is very resolute on the candidates they believe in and not open to change. But we also will find out in a week or two how accurate those polls were. Competitive races, yes, but ultimately, someone wins, and I'm not sure the polls are a clear indicator of that.

Greg Singer:

Yeah. Jim, what do you see in the polls? And maybe as someone who's been inside the campaign, how do you read the polls?

Jim Messina:

Well, I agree with Kim. On campaigns I do, I threaten to fire my staff who read the daily polls, because they're wrong every time. The margin of errors in 2016, 2020, and '22 are pretty amazing. We just won an election in a country in Europe last Saturday, and the polls were really wrong. What we do instead is run pretty sophisticated models of the election. I'm sure Capital Group does, too. Every night, we run 66,000 simulations of the election. We have the presidential election with a 50.1% chance for Harris, 49.9% for Trump.

And to Greg's very smart point earlier, we have both the House and the Senate flipping control from their current controllers. So I think it is clear from a variety of things that it is really hard to do a poll in America these days. It's illegal in some states to call cell phones, almost no one under 40 has a landline, and these seven battleground states are going to decide this election. So many calls a day from the campaigns and from pollsters. It is really hard to get an accurate sample, and that's why you see these polls bouncing all over the place. I'm trying to be more sophisticated, although, Greg and Kim, in the way I criticize it. So now, I will just say that I think mostly the polls are not to be believed.

Greg Singer:

Interesting. Yeah, I mean, I think one thing we observe is even when we've got these betting markets now, right? They'll say the odds are 55%, 60%, and obviously, if you flip the coin 100 times and there were 60% odds, you'd expect to get 60 heads. But if you're flipping a coin once and they're 60% odds, you can't be surprised by heads or tails, right? So I think sometimes people just put too much stake in a poll having a favorite when, like you said, there's thousands of simulations and either outcome is very much within the range of possibility.

Kim Wallace:

Whatever your complaint about public opinion surveys and the pollsters that put them together, there's less structure to the betting markets, or put differently, less belief, more fragility. They certainly reflect a narrow slice of our country. They reflect probably an even narrower slice of the electorate, and they are given to open and known manipulations. So you can have a question and problems with the polls, and you may have fun on the betting sides, but don't take them seriously.

Greg Singer:

All right, good advice. So let's just assert it's a very, very close election. It's likely to be decided by a handful of voters in seven states, as the last couple have been. Is there anything you could see happening in the next week, some sort of October or November surprise, that would fundamentally alter the race? Events in the Middle East, incoming inflation or economic data, a Comey memo? Is there anything out there that you think the campaigns think could really tip the election? Let me start with you, Jim.

Jim Messina:

Great, so yes is the short answer. There's two things in the models that really move the election. The first is a terrorist incident. I was running Theresa May's campaign in the UK when we had the London Bridge incident, that clearly dropped her several points from all the polls and turnout. So when you run simulations, a terrorist incident would be number one that could move things, and two would be some major cataclysmic 2008 economic thing. I'm not worried about that in the next eight days, but clearly, there are a couple things that could move.

Kim Wallace:

I would add to what Jim said, that it's been a fairly frenetic four quarters, full of surprises. So I would think the threshold for the traditional quote, unquote "surprise" going into an election is probably a little bit higher among most voters at this point. You know, I appreciate Jim's confidence. I will time date to eight days that we won't have an economic event similar to the '07 through '09 period, but it comes off after that eight-day period. And of course, he is right. Geopolitics at this point probably represent the largest potential surprise that could move voters' mindsets. But again, we are closing in on time for that to happen, I guess, knock on wood.

Greg Singer:

Right, right. In many ways, with today's media cycles, eight days can still feel like a lifetime. This is an election campaign where we had a candidate drop out and two assassination attempts on the other candidate. So we've seen some really low probability, unusual events throughout this campaign. Let's maybe hone in on election night. We got a couple questions of is the process better than in past years? What will we know on election night? Is this going to linger? What will things look like if we're sitting here a week from tonight on the evening of the election, will we know who won?

Kim Wallace:

Well, the integrity of the process is no better than the people involved, and the choices that they make, at the front end of the process and at the back end. But more than likely, if we have the average, within two and a half, three days, we'll have a fairly strong sense of whether or not we'll need another two and a half, three days to know, or if we have some sense of which way it's moving, not just in the electoral college, but also the House and the Senate, and some of the interesting gubernatorial races as well. So yeah, we're due for ... That's why I earlier gave a little leeway, a week or two, we'll probably have some sense.

Greg Singer:

[inaudible 00:12:48]-

Jim Messina:

Yeah, I agree. I think a couple things. There's zero chance we know who controls the House, because California counts votes slower than molasses, and a bunch of the races are in California, and they have a bunch of early votes that they have to count. So we're not going to know who controls the House, it's unlikely we'll know who controls the Senate. There will be bellwether counties that I'm looking very closely at that will report very quickly, like Erie County in Pennsylvania, which has gone to the winner of the presidential since 1952.

I'm going to want to see the suburbs of Charlotte in North Carolina, which will be the first ... Usually, North Carolina is the first state that we get major numbers from of the big seven. We all remember in 2016 when Florida came in very early and Trump blew Hillary out of the water, we kind of knew it was going to be a good night for him. I'll be looking to see some indication in North Carolina very early, and then I'll be watching the Milwaukee suburbs and Macomb County in Michigan to try to get a little bit of sense. But I'm with Kim, I don't think we'll know, and partially, we're not going to know-

Jim Messina:

But I'm with Kim. I don't think we'll know. And partially we're not going to know because there's already lawsuits about when people can start counting, can they count early or not. And so it's likely that in some places like Philly, we're going to be having lawsuits about when they can start counting. And so it'll be the typical American mess. And Kim makes a very smart point that it's really only as good as the people around it. And I'm not sure that you'd put your best in the brightest on counting votes.

Kim Wallace:

Some of those people to pay attention to are in Clallams County in Washington. They have, since Reagan, chosen the president correctly, 80,000 people as Jim was describing demographics, pretty evenly split. Pinellas County, Tampa St. Petersburg area in Florida has only missed once in that time. But there are some states that have a few ballot initiatives that we will have to wait and see how quickly they come in. People are concerned about Arizona. Arizona officials themselves are concerned that they'll be able to count accurately and quickly a two-page ballot. So there's always know schmutz in the system when we're doing elections. That's not new. Unfortunately, we now have a situation in which the people who attempt to do their best in bringing us the results of decisions made by American voters are themselves under undue pressure in that process. That's, again, a reflection of some of the politics going on in the country.

Greg Singer:

So thinking how this plays out, in 2020 there was discussion of there's going to be a so-called Red Mirage because Republicans disproportionately voted on election day and those votes were reported immediately. Democrats disproportionately voted early or by mail. And sometimes depending on the state, those votes were counted later. So there's a question of would the Democrats have enough votes to catch up. Are behaviors similar in this election? Will we see that same thing again? Or maybe Republican and democratic voting behaviors could be different this time around. [inaudible 00:16:13]

Jim Messina:

They're very different. Yeah, they're very different. Fortunately for the Republican Party, the Republicans have decided not to listen to Trump on this issue and they've really pushed early vote. As you remember last time in 2020, Trump told people not to early vote, and so they didn't. And so Dems racked up this big lead. Right now in the battleground in the seven states, Republicans are doing much better in early vote than they did last time. And so there will likely be less of a kind of demonstrable difference between early voting behavior and election day behavior. And so I think that is one thing that the Republicans are doing better than last time.

Kim Wallace:

And that has, I think, a hopeful sign to it as well. Democracy is best when more people participate, by definition. And so the enthusiasm that's been recorded in four or five states, particularly places like Georgia and North Carolina for early voting, there are no clear indicators of what that might mean in terms of outcomes, choices made. But it is very good that we have Americans energized to get out and exercise the franchise.

Greg Singer:

Yeah. Good. I think we've seen record early voting turnout so far, and that's an encouraging sign for the process.

So from election night through January 20th, right? We talked about, look, it might take a couple of weeks before these races are declared, if you will, but what happens after that? So we expect significant legal challenges. How's this work with the certifying the election? Are you seeing a risk of civil unrest is something that has been talked about. How does this play out in the weeks following the declared winner maybe once the votes are counted?

Kim Wallace:

We'll be smarter about that in a month or so, but I sense that there's a lot more legal activity available than there is social unrest. I say that in part because we know both parties have, as they say, lawyered up and they have central command posts in key regions with a lot of attorneys watching and waiting on the process.

In terms of social unrest, you couldn't and you wouldn't want to predict, but I would think that the aftermath of the January 6th experience has reduced the number of Americans available for that type of activity. Lives have been changed permanently. Jobs lost, family split, people incarcerated. So whatever the pool that was available four years ago for that type of mischief, I would imagine it's lower now.

Greg Singer:

Tim, you seeing the same thing?

Jim Messina:

Yeah, for the most part. I didn't want to do this, but I was made to be the chair of a democracy, Super PAC. Apparently, Greg, democracy needs its own Super PAC now. And to Kim's point, there's just huge lawsuits all over the place, already a hundred lawsuits in the seven battleground states before election day. I totally agree. If it's as close as we think it could be, we're going to spend a month all suing each other over various counting things.

I think it's right that we're not going to see a January 6th thing. I think what we are probably going to see, which we didn't see as last time, is a little bit more confrontation at the ballot box at the polls. Both campaigns are gearing up and say they have election observers which are going to be pushing one side or the other. There's a group of people saying they're going to try to ask for people's IDs in the battleground states, even though that's not the law. That'll very quickly come to blows if they do that. So I think we may see some light unrest and some civil disobedience on election day, but no sort of massive January 6th thing. Although we have not seen this before on election day, so it'll be a bit of a shock to the system.

Greg Singer:

Yeah. So it could be different than last time as far as the pacing. So it feels like a process where don't expect to have an answer on election night, probably have some good indications a week or two out. The legal systems have to play out that we challenges coming from both parties for a period of time until we get the certification.

Let me now maybe switch gears and think about some of the economic implications and maybe I'll try to get us down to two scenarios. The broad consensus is that the Republicans will take the Senate. If we just look at the map of where the seats are up, the Democrats are defending a lot of incumbent seats in states that Trump is expected to win, although really have to run an inside straight in order to maintain the Senate. So if we just assume from over Republicans take the Senate, we probably have two scenarios we can focus on, and we can assume that whoever wins the presidential election maybe takes the house with them. So I might look at our red wave scenario. Trump wins and all three houses are Republican. Might look at a scenario where Kamala wins, takes the House with her, but we have divided government with the Republicans in the Senate.

Maybe Kim, let me start with you. How do you think about the policy implications of those two scenarios? Broadly, what do you think is the impact for, say, let's start with the economy, interest rates, inflation, and we can talk a little bit more down to the legislative issues after that.

Kim Wallace:

Well, I like the way you phrased it, particularly at the end, Greg, because policy matters often and sometimes it is the primary driver of outcomes in the economy. But generally it's the fundamentals that matter. And we're fortunate, at least in the nearest terms, in the U.S., to benefit from an economy that looks strong from the top down and resilient to strong from the bottom up as we go through third quarter earnings. That's a positive. It's the benefit of many of the rules and systems we have in place in the U.S., including independent central bank, whatever you think of their management of their dual mandate is difficult to make a case that they have not been careful and effective in the last two years, two and a half years especially. That's a benefit.

And so you walk through the election process and more importantly the governance process. It is very rare in Washington to see substantive consequential policy moving through in the first half of year. Certainly there are times that that happens usually in times of crises. As Jim can still remember, unable to forget the first six months of '09. But generally, it takes a while for the system to settle itself and identify priorities. My sense is that when you start from the top down, as presidents often do, geopolitics is not going away just because of the U.S. election, something Jim referred to. So that'll be the incoming team's constant brief. After that, depending on who wins, we pay a little bit more attention to international economic policy, not just tariffs, which gets disproportionate and understandable attention, but also the state of export controls and sanctions fashion. Certainly, the reserve currency matters a lot and gives a heft to the U.S. That's not going away anytime soon. But my sense is that the international policy, both geopolitical and economic, will be more of a conversation pressing the abilities of the incoming White House in quarters 2, 3 and 4 next year. The first quarter, probably not that consequential, barring unforeseen events.

Greg Singer:

Yeah. So strong underlying economic growth right now. Also benefiting from the Fed starting to cut rates on top of that and continued strong levels of employment, right? So your view is that those core factors probably go forward. The first six months is more of a focus on some of these geopolitical and international issues. Jim, are you seeing the same thing as far as let's say first six months of priorities of an incoming administration?

Jim Messina:

Yeah, no matter who wins the White House, one important thing to remember is the Trump tax cuts expire at the end of 2025. And so I agree, the first six months you're going to have a new president trying to get control of his or her apparatus and put together a government, which means confirmations are going to take way more time. Kim and I have lots of PTSD from how long it takes to get major Treasury and state department officials confirmed, and that stuff is going to take time. But then eventually both sides are going to have to sit down and figure out what to do about the tax cuts and what to do about the budget. If there is a red wave, it gets much easier. The Republicans will do budget reconciliation instructions and attempt to figure out by the end of the year how to move forward with redoing some of Trump's tax cuts.

At some point, we're going to have to deal with the debt and deficit issues. Weirdly, in divided government everyone says, "Oh, that's terrible." Two things about divided government. One, it's what the country wants, to Greg's earlier point, six out of the last seven elections have been change elections because Americans want both sides working together.

Second thing is this last Congress was the least productive in the history of modern America, and I'm not sure that's the worst thing. I mean, when you look at this, and my friend Larry Summers and I talk about this all the time, not having Congress passing a bunch of bills gives investors certainty. And when governments come in and change all the rules, that can be very scary too. Look what happens every time there's a French or an Italian election. So having some time for the new president to take a deep breath, figure out this foreign complex, figure out where we're at, and then start to work bipartisanly on some of these issues I think is something that will be very, very good for the country because we need some consensus on how to move forward because right now we don't have any.

Greg Singer:

Yeah, it's interesting. In our research, we've seen the long-term results of, say, the economy, the stock market is about the same whether we elect a democratic president or Republican president. So I think it gets to your point of-

Jim Messina:

And on that point-

Greg Singer:

... really a little less, yeah.

Kim Wallace:

On that point, evidence of the last four years in Washington, the only things that have been legislated have come through the middle. The programs on the hard right or the hard left have flailed. And I think in part, the U.S. electorate, the country as a whole has had a very and lingering taste of real crises in the last four years. The pandemic and the supply-side shock inflation that came with it changed a lot of lives and still are pressing a lot of households. So the ability for fabricated prices to motivate Americans, I think, is waning as an input and frankly becomes more of a political risk, I think, for those who try to foment that type of crisis. It is overall beneficial to the country and the markets, in my view.

Greg Singer:

Yeah. You mentioned the tax policy coming out with the 2017 Tax Cut and Jobs Act expiring at the end of-

Greg Singer:

With the 2017 Tax Cut and Jobs Act expiring at the end of 2025, absent new legislation, we go back to the rules prior to that act. Maybe I'll start with you, Kim. How do you see that tax policy playing out under either the two scenarios?

Kim Wallace:

Well, I would say first you have to observe that whatever you think you've gleaned from the campaign trail about that process is worth nothing. As we have discussed, there'll be a settling, as Jim puts it, of the apparatus of the next president. And then you begin the discussion with the powerful committees in Congress. That's never a quick process. The rules in the Senate from a fiscal standpoint based on the 1974 Budget Act are much more onerous than the House. And so the ability of one side to use reconciliation, which lowers the threshold of votes in the Senate from 60 to 51, constrains your ability to blow out the deficit.

And then as we saw in 2017, that legislation took the better part of three quarters to negotiate as the House tried to find its way through offsets that didn't work. And then finally they settled on a path and it took some time to negotiate in the Senate. So the benefit to investors, I think, as we come to the end of 2025 is the process will move slowly, it'll be extraordinarily public, for the most part, and easy to follow. But it's highly unlikely to culminate until the second or third week of December 2025. Usually that's a benefit to market participants.

Greg Singer:

Right, so it goes down to the wire and probably requires some level of compromise?

Kim Wallace:

And is constrained within some reasonable parameters, at least they seem reasonable now.

Greg Singer:

Yeah, Jim, what are you seeing? And maybe I'll just add, it seems the markets over the last few weeks are finally paying attention to the size of the U.S. debt, which I think will be a big part of the discussion potentially next year as we go through this process.

Jim Messina:

I hope so, Greg, but color me skeptical. Both parties have spent like drunken sailors in the past and there needs to be some dealing with the debt. But when you look at it and look at what both parties are saying, and I agree with Kim, campaign rhetoric is useless. But we are probably very likely going to have very small majorities in both the House and Senate. And it is really difficult to address major things like the debt because to really deal with the deficit, you'd have to deal with entitlements. And with these small majorities we're likely to have, I think there's a better chance I'll become a supermodel than dealing with this.

I do think you can begin to have a conversation. And it needs to start to happen because both parties need to understand their roles in this and why we have to start addressing it. And that really is going to take people in both parties having some difficult conversations with their own parties about traditional places and political opinions. And I think to Kim's point, we're going to have time to do that next year. It's going to take a while to start negotiating this tax thing. I ran the campaign to pass Obamacare and everyone in DC said it would be over in six months, and 15 months after Barack Obama became president, we signed Obamacare into law and that was without one Republican vote in the House or Senate. That was a partisan process. So I agree with Kim, for a bipartisan process on big things like taxes, even put entitlements aside, but just to extend the Trump tax cuts, we are going to be waiting for the intoxicating jet fuel in December of next year to get members of Congress to actually move on this.

Kim Wallace:

Jim raises two good points and it's two constituencies I think that Washington elected officials, fiscal authorities are going to eventually have to have a serious conversation with. One is themselves, but another are their constituents, about what's not only doable, but what's prudent over the intermediate, long term. And then I think the point you raised, the markets are not innocent bystanders here. They are stakeholders. And my sense is maybe not in the same way that we saw in '92, '93, but certainly the bond vigilantes have watered the horses and saddled them up. You'll forgive me for that, Jim. And they're ready to ride. So two constituencies to pay attention to in the next six quarters, in my view, not just 2025 constituents and markets as well.

Greg Singer:

Okay, so that was a reference to Jim spending some of his time on a ranch in Montana. So if you see the bond vigilantes out there, Jim, you'll let us know. The other related thing here is tariffs. And would love thoughts on how tariff policy plays out, what's been a live discussion during the campaign? And how much of that as well can a president do on their own versus what requires legislation?

Kim Wallace:

Jim, you kick it off please.

Jim Messina:

Great. So a couple things. One, I think there's this assessment in New York, and Kim and I were laughing earlier that New York doesn't always get it right, but that Trump's actually not going to go through with his tariff stuff. And I just don't think that's based in any sort of reality. There will be some version of it. And I'm not trying to be partisan here because there's only two things that are bipartisanly supported right now in Congress, and that is to be anti-China and anti-Big Tech. And Democrats would help Trump do some of the tariff stuff against China. There was this tabletop exercise with a bunch of former administration officials, both Republicans and Democrats, to talk about what to do about China. And when the tariffs stuff came up, former Treasury secretaries of both parties said, "You do realize that that would tank the American economy if we did this?"

And as my European and Asian presidents and prime ministers remind me all the time, if America gets the cold, we get the flu. And so this tariff stuff is real and it's concerning. And I think that it's not just about Trump, both parties have gone native and gone populist here in a way that I think isn't good, doesn't understand how we actually got to this American bout of competitiveness post-World War II on free trade and globalism. But it is where both parties are. And if Trump gets elected, Chuck Schumer, the leader of the Democrats in the Senate, will help him do some of this.

Kim Wallace:

It's important to keep in mind as we go through this process, and Jim's right, whomever is elected as 47th president comes into that as a protectionist based on their party's policies, either small or more than small protectionists. The second point is that to change that view, you'd have to negotiate first within your party and then across the aisle. That's difficult in the context that Jim describes accurately.

But what muddies the process is, of course, the flu that Europe gets, that comes in the form of retaliation. And it not only affects our allies, it affects U.S. consumers, it affects U.S. businesses and exporters who use semi-finished products in their business. And one I think underappreciated, certainly underdiscussed muddying of the water, if you will, is the process then that invites American businesses to come to Washington to beg for relief. And so that's a process that's not transparent. It's a process that reduces the efficacy of policy outcomes that you would hope for otherwise. It is certainly that basket of muddied water, to torture the metaphor. It is a recommendation, I would think, to Washington to recognize the politics of the moment, but to also be thoughtful and careful about policy because the implications are not as easy as the politics.

Greg Singer:

You have to think of the second, third order effects when you put your tariffs on. So it sounds like a consensus across the two of you highly likely to have some level of increase in tariffs. And then that's something that potentially hurts the global economic growth

Kim Wallace:

And it hurts the country in terms of growth, it nicks GDP. It certainly increases import prices and consumer prices. So yeah, there's a lot to think about there. That's not as easy as the politics.

Greg Singer:

All right, let's maybe move into the final segment here. Think about some industry implications, which was ultimately where push comes to shove for us is really thinking about the upside, downside case. Let's maybe start with the banking system. So one of the questions is about regulation of banks, mark-to-market rules come into effect post the First Republic crisis. And then you have also the, this is maybe a broader question, the Chevron deference Supreme Court ruling, which maybe limits the ability of regulatory authorities going forward. Maybe Kim, I'll start with you. What do you see as the impact on the banking system in those two scenarios?

Kim Wallace:

Well, favorable from a top-down view. A strong economy, again. Still a growing economy, more economic activity than had been projected the year previous. So that's a pleasant outlook. As you say, most banks that need to have been provisioning against loan losses and they're available for sale and held to maturity books. That's positive. And whatever your view was a year ago on the outlook for capital standards for banks $250 billion total assets and above, it has changed meaningfully through the work and the statements of the Federal Reserve Chair. And so both from a technical and policy standpoint at 22V, we think--we tend to think in ETFs it's easier because we don't do fundamental company analysis. I don't think that that changes--.

Greg Singer:

That's the real estate and the bank indexes?

Kim Wallace:

That's the regional banks and the larger banks.

And so my sense is if you look at banks $50 billion and under who have a strong presence in their market, they have a much lower regulatory hurdle to begin with, we find them to be attractive from a policy standpoint. And then the money center and the globally systemically important banks 750 and above, multiple lines of revenue domestically and internationally, certainly sophistication in managing compliance and regulatory issues. And so we think there's more reason to be less concerned about banks, I'll put it that way, than maybe a year ago.

Other sectors that we think irrespective of the outcome. Defense is going to get a bid. It's not just the two or three-year replenishment process in front of the U.S., it's also the EU buildout of their defense infrastructure. Japan, South Korea, the same. India in the process of weaning itself a bit from its Russian reliance and turning more To the West, including the U.S. Saudi Arabia, part of the policy normalization that President Biden had been negotiating with Israel and Saudi Arabia included a tighter relationship on technology and specifically geostrategic technology. And then finally housing. Both candidates talk about housing in different ways, but probably in ways that give support overall to the housing sector.

Greg Singer:

Interesting. Jim, maybe let me pick up with you. You talked about the one thing both parties tend to agree on a little bit is regulating Big Tech to some extent. What do you see as the outlook for say, artificial intelligence and regulation of artificial intelligence?

Jim Messina:

Yeah, it's a really interesting question. I think that's one place where there's been real bipartisanship. The Senate held a rare joint session to meet with the AI heads and discuss some of this. Color me very skeptical that we're going to have major reform on the tech companies. We will wind our way through the trust process in the courts. I don't think there's any chance we're going to get Section 230 reform, which would be the liabilities for social media platforms, passed.

But I do think on AI, there is a really big willingness among both parties to try to figure out what to do. Whether they can actually pass a bill, maybe it's guidelines, maybe it's some other things. The state of California, obviously the largest economy in the world, just passed a bill, which the governor vetoed on this. And so I think that there's going to be continued bipartisan work to understand the complex of AI.

And speaking just broader for a second to Kim's point, when you think about American competitiveness, there's really five things that America has that are truly beneficial drivers of our economy. That's Silicon Valley, our higher education system, which is better than anyone in the world, defense, pharma, and banking. And my hope is that bipartisanly we're going to put aside the politics. Obviously pharma has been the biggest recipient of politics back and forth on this. But a new president, a new Congress gives us an ability to step back.

Jim Messina:

A new president, a new Congress gives us kind of an ability to step back and say, how do we sort of govern jointly here? There's real bipartisanship on regulating crypto. There's bipartisanship on trying to move forward on AI. To Kim's point, there's real bipartisanship in the defense world because there's so much opportunity there and we're going to need to restock after the dual Middle East and Ukraine Wars, as well as our European friends. So I hope that a new Congress and a new president can step back and have a broader theory of the American competitiveness case.

Kim Wallace:

And some of the reasons that they should, underpinning Jim's five points are, we have other unique rules advantages in the U.S. We have a generally transparent, generally equally applied rule book. We have the benefit of dual intermediation, we have very robust credit and financial markets. We have a system of economic governance that is established by executives and legislature, but also backed up by the courts. And so redress is available to people who feel that one of those branches may be overstepped. These are benefits that are not taken together, generally enjoyed anywhere else in the world. It's one of the reasons the U.S. remains the top locus for foreign direct investment. Politicians would be deficient to ignore these advantages as they work through some of these challenges.

And especially as Jim pointed out, the risk, if you will call it that in big tech, doesn't come from the elected policymakers. That's going to be the purview of the courts. Judge Mehta's ruling has started a process now where the courts are going to be involved in big tech a lot more than elected officials going forward.

Greg Singer:

Yeah. One thing I've off heard said is, we're the worst government there is except for all the others. So for all the things we worry about [inaudible 00:44:09], the U.S. has these very significant cultural and legal advantages. In our research team, we're just looking a report from European leaders who are really fretting about how far they're falling behind on technology and productivity relative to the U.S. And how do they change their culture and change their incentives to catch up.

Kim Wallace:

And one of their leading lights in policymaking, Mr. Draghi has written really the follow-on report of his first report that he did with others in 2015. The so-called Five Presidents Report that basically said there are structural impediments to the EU, Europe becoming a stronger player in the globe. And he's followed that up with specific recommendations in the last six months. You hear lately, Nagel of Bundesbank talking about the need for a capital markets union. This comes from somebody who's in the country that clearly leads in capital markets. In the [inaudible 00:45:11], we need more unity on this issue. We need less strong influence from one country and more shared responsibility. There's hope, but there's not a lot of time.

Greg Singer:

One other technology question that was written in that I'd love to get your input on, maybe I'll start with Tim on this one. A central bank digital currency, is that something in the offing?

Jim Messina:

Yeah, this is a great question. I'm glad you asked it, Greg, because there's this bipartisan consensus in Washington DC and I'd love to hear Kim's opinion on this, that a central bank currency and crypto could threaten the hegemony of the U.S. dollar. And there's been some concern among treasury and there's been bipartisan, both Trump and Biden refused from their treasury to give guidance to lawmakers on crypto reform because they're worried about it. Obviously China's moving forward with their currency. Other countries are as well. I think among the ruling elite in treasury and the Fed, there is real resistance to it. That said, I think one of the only bills that could pass bipartisanly is some sort of crypto guidelines. I think the crypto industry is desperate to have some sort of rules by the road, especially given four years of sparring with SEC Chairman, Gensler.

They are unpleased with this situation and are screaming bipartisanly to give us some rules so we can innovate. And I think Congress understands that and would've moved a bill forward if they kind of had a willing participant in the administration. And one of the things that I know both Republican and Dem leaders have talked about in the first six months of next year, while to Kim's point we wait for or confirmations and tax reform, I think you're going to see crypto bill on the floor of the house and on the floor of the Senate moving forward. Kim, I'd love your opinion on whether that threatens the U.S. dollar.

Kim Wallace:

I don't believe it threatens the U.S. dollar, both in terms of the pace at which these developments would move slowly, but also the careful intent of people who would eventually put together proposals. Jim is right, the benefits, the advantages, broad base of digital assets won't bear fruit until there's a basic rule book. You have some of that put in place by the courts and ripple decisions, gray-scale decisions. But you need to legislate as Jim alludes, the SEC and the CFTC they'll contribute to the rule book, but they will not be the capstone to the rule book. In terms of digital currency, a couple of thoughtful people, Governor Waller of the Fed last week or the week before focused on both the benefits of encouraging technology, blockchain, but also the potential benefits of increasing the payment system. He was not speaking directly about a central bank digital currency competing against the large banks and other issuers, and certainly not competing against the currency of the U.S. I don't think that that's a reasonable conversation, at least in the nearest of terms.

And so yes, room to go but also opportunities for the pace both in terms of digital assets and the further inspection of central bank digital currencies to go forward. Keeping in mind that another bright light in policy, Mark Carney almost a decade ago, his last speech at Jackson Hall focused on the questions of why we have one reserve currency. And are we at the point where policymakers need to contemplate the potential limitations of that and the potential opportunities in the right circumstances of a few more reserve currencies to facilitate trade finance regionally and globally. But also pressing that the conditions have to be right. I don't see that developing soon, but I don't see any of that as a natural threat to the dollar.

Greg Singer:

All right, interesting. One final thing I wanted to pick up on. You talked about some of the advances of the U.S. structurally and maybe, Kim I'll start with you on this question. What's the outlook for small business and starting new enterprise under current conditions and would it be different depending on the election outcome?

Kim Wallace:

The answer to that is always from where you sit, you start from that. So if you're a small business person, you see a lot of hurdles to your success. Cost of capital is recently becoming less of an issue, but for the last two and a half years it's been very much an issue. At the same time in the last six months there's been a lot of excitement about the small business sector, in part because if the U.S. is growing strongly and it seems sustainable, that sweeps up a lot of companies, especially small businesses. Especially if we are at the beginning of our rate cycle no matter where you think it ends or how soon, where money is going to be become less tight for small businesses. And if you underpin that with a healthy bank system, particularly those banks 50 billion and under, that paints a better picture for both capital formation and business activity at the smaller end of the economic scale.

Greg Singer:

Jim, you're seeing a similar outlook?

Jim Messina:

Yeah, no, I completely agree. I think one of the only bright lights in this dark campaign for president has been bipartisanship on small business. The Democrats trying to out small business, the Republicans which is interesting and new. I also think that there's real things. I think both parties think we've gone too far on regulation and that will obviously help small businesses. First to Kim's point, and I think there's governors who are governors and are always the sort of laboratories of democracy. And they're sort of out competing each other to attack small business and grow small business. And there's some really interesting things for the federal government to learn in the successes in some of these small governors who've done really good things. So I am very bullish on the future of American small business for all of those reasons.

Greg Singer:

All right, so it's a nice consensus there. So we're approaching at the top of the hour. I'd maybe love to get some final thoughts from both of you on what should our listeners be taking away from this conversation. Maybe Jim, I'll start with you and then we'll finish with Kim.

Jim Messina:

Yeah, maybe Greg because it's that I have 15 presidents and prime ministers as my clients, but I was just in an election this week in Europe. And when you look at what we talked about earlier, the keys to the American success, our ability to innovate our education system, our universities, our banking system, Silicon Valley, et cetera, every single country in the world would trade all of their cards for our economy. They'd trade all of their cards for our ability to innovate. Going forward, we're going to be fine. We have a 10 square mile logic free zone called Washington D.C. where we have some political divisions. That's the reason we started out this conversation about, because we really are that split as a country. So of course our politics are going to screw that up. But this happens four or five times a century and we always innovate and always kind of figure our way around it.

I'm the most optimistic person you see every day because I think it's clear we're going to do that here and you'd rather be us than them. We're going to be fine, you just probably don't want to move to Washington D.C. anytime in the near future.

Greg Singer:

All right. Kim, living in Washington.

Kim Wallace:

I couldn't agree more, but I would also say that the ingenuity of the American people and work ethic generally is of also strong benefit. And if you step away from the politics and it's not difficult to do, but if you step away from the noise machine of the politics, what's in the interest broadly of most Americans is to get beyond cultural differences many of them fabricated. And work through the impediments to growth, work through the impediments to broad-based sharing of these benefits which are obvious and robust in the U.S. And I'm with Jim, I call myself more constructionist than an optimist but I lean optimistically on this, that it's much easier in today's world away from the noise machine to identify the opportunities to improve what we have going on in the U.S. as opposed to allow it to atrophy by default.

Greg Singer:

All right. Well, Kim and Jim, thank you so much for sharing your thoughts and insights with us today. I found the conversation fascinating. To our audience, thank you again for your questions. If we didn't have time to answer a question that you sent in or that this discussion brought up, please do reach out to our Capital Group private wealth advisor. We do have one last request of you. A brief survey will appear shortly on your screens. We greatly appreciate you taking a quick moment to fill it out. Your response provides valuable insight that helps us shape future events. I'll also note that we have a webinar coming after the election on November 7th, that'll feature some of our Capital Group political experts, John Emerson, former ambassador to Germany, Matt Miller, our head of political research and Reagan Anderson of our Washington D.C. office. You'll receive a follow-up communication after this that will give you information on registering for that webinar if you want to get updated on the status a couple of dates post election. So again, thank you all for your time and we look forward to hosting you at our next event.